Obama Asks G-20 States To Maintain Stimulus

By SEWELL CHAN

Published: June 19, 2010

WASHINGTON -- President Obama will face significant challenges at a summit meeting in Toronto next week, where he will be trying to secure cooperation from European and Chinese leaders in nurturing the still-fragile recovery of the global economy.

European countries are pulling back on spending with a speed that the Obama administration believes could derail the global recovery. China signaled this week that it would not let its currency rise in value anytime soon, raising the prospect of a showdown with Congress. Germany and France have turned skittish about an American-led push to raise capital and liquidity requirements for large banks.

Meanwhile, the United States and Britain favor a tax on the giant banks, but do not support a further-reaching proposal by the European Union to tax financial transactions. Canada, Japan and Australia oppose any form of bank tax.

The disagreements threaten to hurt the effectiveness of the Group of 20, the expanded club of nations that Mr. Obama and his predecessor, George W. Bush, have used to coordinate the response to the financial crisis.

''The G-20 has shown impressive solidarity in the crisis phase, but as an uneven recovery begins, maintaining cohesion is becoming more difficult,'' said Stewart M. Patrick, director of the Program on International Institutions and Global Governance at the Council on Foreign Relations. ''The 'fellowship of the lifeboat' will be harder to maintain as the acute crisis passes.''

The extent of the administration's concerns was revealed Friday in a letter Mr. Obama sent to his G-20 counterparts and in subsequent statements by administration officials. ''Our highest priority in Toronto must be to safeguard and strengthen the recovery,'' Mr. Obama wrote.

The letter included a message evidently aimed at Germany, Britain, France and other European countries that have recently unveiled plans to pare spending, mindful of the wrenching consequences of excessive public debts in Greece and Portugal.

''We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession,'' Mr. Obama wrote.

The United States is trying to rein in its own debt. Mr. Obama reiterated a pledge to cut the deficit, now about 10 percent of gross domestic product, in half by the 2013 fiscal year, and to 3 percent of G.D.P. by the 2015 fiscal year, which he said would ''stabilize the debt-to-G.D.P. ratio at an acceptable level.'' But he has put off any aggressive deficit-cutting until after November's midterm elections.

He also wrote that ''market-determined exchange rates are essential to global economic vitality'' -- a reference to the view that China's currency, the renminbi, is undervalued.

The Treasury secretary, Timothy F. Geithner, deliberately missed an April 15 deadline for issuing a foreign-exchange report that could declare China a currency manipulator, a finding that would prompt retaliatory duties against Chinese imports.

At the time, Mr. Geithner said the G-20 meeting in June would be the logical forum for addressing the currency issue.

But on Friday, two Chinese officials, Cui Tiankai of the Foreign Ministry and Zhang Tao of the People's Bank of China, told reporters in Beijing that China would move at its own pace. Mr. Cui said the renminbi was ''not an issue the international community should discuss,'' a position at odds with the Obama administration's.

''What the president said is something that the G-20 nations all agreed on last time around, which is that we'd all be better off with a market-based exchange rate,'' a White House spokesman, Bill Burton, told reporters Friday.

The divisions within the G-20 reflect in part the diverging economic paths of its members. Emerging-market economies like China's are leading the global recovery. The move by consumers to save more and spend less has led to slower growth in the United States. The economic outlook is weakest in Europe.

''The unity of the G-20 is beginning to fray as economic recovery takes hold at differing rates and divisions emerge on key issues such as fiscal consolidation versus continued stimulus, the timing and content of new capital rules, and the desirability of a bank levy,'' said Daniel M. Price, who was President Bush's personal representative to the G-20.

Indeed, Mr. Obama cited the agreements reached at last year's G-20 meetings in London and Pittsburgh -- increased government spending, reform of financial systems, a goal of balanced global growth and an avoidance of protectionist trade measures -- in arguing that the G-20 must be ready to step back in if needed.

Jacob Funk Kirkegaard, a Danish researcher at the Peterson Institute for International Economics in Washington, said the situation in Europe might not be so dire. He noted that Germany, Europe's largest economy, had proposed phasing in fiscal austerity gradually, that the European Central Bank had shown success in responding to the sovereign-debt crisis and that a new plan to administer stress tests on banks was likely to improve market confidence.

But in the short term, at least, Europe's woes have complicated the American desire for a global economy that is more ''balanced'' -- that is, less reliant on debt-financed consumer spending in the United States.

The euro's decline means that the renminbi's value has effectively gone up, on a trade-weighted basis, lessening the Chinese rationale for appreciating the currency against the dollar. And the debt crisis has led to lower yields on Treasury securities, making borrowing by the United States government cheaper.

PHOTO: Workers are building a security fence in Toronto at the site of the Group of 20 meeting scheduled for June 26 and 27. (PHOTOGRAPH BY MARK BLINCH/REUTERS) (B2)